Tomas Gärdfors says EU member states will have to align their regulations and cooperate more if adequate investment is to flow to achieve the bloc's energy infrastructure ambitions.
In an ambitious communication on 25 February, the European Commission set itself 15 action points for the implementation of the Energy Union – a set of proposals to improve energy security and reduce carbon emissions in the EU. One of these action points is to support the implementation of major infrastructure projects, particularly those identified as 'Projects of Common Interest' (PCIs).
The Energy Union will seek to address this, firstly by mobilising funds to upgrade and extend transmission systems, in particular interconnectors, to create an integrated, continent-wide energy system where energy flows freely and competitively across borders based on best use of resources. Secondly, it will encourage streamlining of regulatory regimes across the EU and more centralised oversight, incentivising long-term private investment and funding. And thirdly, it will try to inspire investor confidence based on price signals and stable regulation that reflect long-term investment needs.
Investment in interconnection
Europe's existing transmission and distribution grids need to be adapted to bringing power from its source of generation to its users, including across borders. Changes in energy generation are moving at unprecedented speed and bottlenecks currently hinder efficient delivery of power from where it is produced to where it is used.
Transmission and distribution networks are currently not adapted to new demands and require substantial investment. The European internal market does not yet work properly. Many existing transmission and distribution networks are outdated and, in most cases, built by domestic operators for domestic purposes driven by domestic politics. The fragmentation and market design does not allow sufficient investment and competition. Traditional transmission operators are strapped for cash and are suffering losses, limiting their ability to build out.
"Market integration of renewable energy sources requires flexibility"
Market integration of renewable energy sources requires flexibility, which in turn requires modern and evolved transmission systems. Import dependency, old, unsuitable infrastructure, lack of investment and the need to shift to a low carbon economy are some of the reasons for the Commission's desire to overcome the fragmented energy market.
To achieve a resilient energy market and to implement the Energy Union the EU needs to improve electricity interconnection. Interconnectivity will reduce energy dependency and the investment requirement in peak power generation and storage, as electricity can be transported to where it needs to be. This is also needed to meet the EU's ambition to be the world leader in renewable energy.
Regulation
Currently, the EU has 28 national regulatory frameworks. But, for the internal energy market to operate in practice, a fragmented system based on uncoordinated national policies cannot continue. A solid regulatory framework is a prerequisite for the necessary infrastructure investments to happen in time for 2020.
The Commission notes that achieving a single market requires strengthened EU-wide regulation, together with significantly reinforced power and independence of the Agency for Cooperation of Energy Regulators (ACER). Although not expressly stated, however, it seems clear that ACER will become more of an EU energy regulator than an overseer of national regulators. This would make sense, as interconnectors are inherently complex, politically sensitive and nationalistic.
Connecting the dots
An 'investment portal', which is being set up in conjunction with the European Fund for Strategic Investment (EFSI), is intended to give investors access to information about the investment pipeline. Infrastructure investors are very diverse in terms of target returns, investment policy, geographies and risk appetite. Some look to more traditional project finance structures where the available funding means can be useful, while others look to invest in or acquire transmission system operators, thereby investing indirectly in PCIs.
"Infrastructure investors are very diverse in terms of target returns, investment policy, geographies and risk appetite"
So far, there have been a number of initiatives to promote and incentivise investment in energy infrastructure: PCIs, the Connecting Europe Facility, EU Cohesion Policy Funds, the EIB's Project Bond Initiative, the European Energy Programme for Recovery, EFSI and financing under the European Structural and Investment Fund.
The Commission now intends to pool resources to finance economically viable investments that counter market distortion and fragmentation. The Energy Union is intended to bring cohesion to the existing financing schemes – connecting the dots – to maximise impact.
The future for Europe's energy infrastructure
The intentions for Europe's energy infrastructure are good and, if these play out as proposed, it may even be where it needs to be by 2020. This will, however, require defragmentation, regulatory alignment, political coherence and a will to cooperate across countries, regions, institutions, funders and governments. It is very much at the junction of regulation, politics, national interest and return on investments. The right signals need to be sent to the investment community.
Only a few years ago, there was talk of a wall of debt. This has now changed and there is a wall of funds. But the conditions must be right for such funds to be deployed. Despite this abundance of available funding, if the conditions are not appropriate, finance will go elsewhere as resources and patience are finite.
Tomas Gärdfors is a London-based energy partner at global legal practice Norton Rose Fulbright. A full briefing on the Energy Union can be found here.
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